First, a scary statistic: Gartner predicts that in less than three years, 35% of enterprise IT expenditures will happen outside of the corporate IT budget. Employees will regularly subscribe to collaboration, analytic and other cloud services they want, all with the press of a button. Others will simply build their own applications using readily available cloud-based tools and development platforms.

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First, a scary statistic: Gartner predicts that in less than three years, 35% of enterprise IT expenditures will happen outside of the corporate IT budget. Employees will regularly subscribe to collaboration, analytic and other cloud services they want, all with the press of a button. Others will simply build their own applications using readily available cloud-based tools and development platforms.

Either way, the corporate IT department will be bypassed. As one industry pundit put it, "it will feel like the inmates are running the asylum."

Now, the reality: Employees have been doing an end run around corporate IT and using shadow IT systems -- that is, systems built and used in companies without organizational approval -- for decades. Look no further than the volumes of company and customer data stored in Excel files scattered from here to kingdom come. Indeed, results of PricewaterhouseCoopers' Digital IQ Survey indicate that at 100 of the companies PwC ranks as "top performers," IT controls less than 50% of corporate technology expenditures.

Those percentages "are not shocking at all because in many cases, the person who understands what to buy is not an IT person," says John Murray, CIO at Genworth Wealth Management in Pleasant Hill, Calif. "Classic shadow IT is out there, and if it's something that is serving a purely functional need and is something that is not customer-facing, it's not the worst thing in the world."

In general, people are much more tech-savvy. They know what is possible. Everyone is trained that 'there's an app for that.'

Dion Hinchcliffe, Executive Vice President, Dachis Group

So what's the big deal about the Gartner statistic, and why does it spook so many of today's IT professionals?

There's the loss of control, of course. But more alarming is the exponential growth in the number of rapidly emerging consumer technologies, cloud services and roll-your-own apps. It's both a volume and velocity issue. Ten years ago, in contrast, a scant 10% of tech expenditures happened outside of IT, according to Dion Hinchcliffe, a veteran business and IT strategist and executive vice president at Dachis Group, a social business consultancy in Austin. "Now, IT is cheap, often free. That allows people to evaluate and acquire solutions on the ground," he notes.

And more of the workforce is doing just that. "In general, people are much more tech-savvy. They know what is possible. Everyone is trained that 'there's an app for that,' " Hinchcliffe says.

Rather than standing in the way, some of the savviest CIOs are embracing and even encouraging so-called rogue IT.

As Kraft Foods CIO Mark Dajani put it, "Why create a technology environment that will just drive to average [business] performance? To empower employees to do it their way is a huge deal. It's an inevitable reality. As I see it, there's a bigger risk associated with not doing that."

Here's how you can -- and why you should -- lead your technology organization through the transition from "command-and-control IT" to what Hinchcliffe calls "cooperative IT."

Accept the inevitable

At Genworth, the company's trading team is using an outside application developer for certain services. "IT knows about it, but we're not driving it," Murray says, noting that IT doesn't operate at the speed that the trading team requires.

Today, "applications are not done by IT; releases are not done by IT. Instead, [business is] operating in a different sandbox, which requires a different team and a different cycle," he says. Instead of tussling over ownership and control of certain services and applications, Murray says IT focuses on what data the applications use, whether or not an application is mission-critical, and who is in the best position to know the application is running properly.

"The world is changing, and you have to be honest enough to acknowledge that your business customer is sometimes the most appropriate owner of a particular application," he says.

Instead of fighting to retain control, IT leadership should focus on managing risk and learn to spot where employees are adding value with their self-provisioned tools and services, says Brian Lillie, CIO at Equinix, a Redwood City, Calif.-based company that operates large data centers in 13 countries.

Workers in Equinix's vertical marketing group used the Amazon cloud to build what Lillie describes as "a very slick sales tool" that measures network latency around the world, depending on where your IT assets are located.

"My team didn't do it, but I still like to brag about it. It's a key tool," Lillie says. Now, IT is exploring how to integrate the tool into other systems at the company.

"Instead of us throwing up roadblocks, we said, 'Let's enable this and give these guys a way to exploit it,' " he says. "It definitely requires a mind shift [for IT]. "But people are creative and want to innovate, and sometimes real breakthroughs can come from anywhere."

Get ahead of the demand

New York-based Sesame Workshop, the producer of Sesame Street, has more than 100 employees working with outside vendors to make interactive games and toys licensed by the nonprofit organization. They were using cloud and consumer technologies, such as YouSendIt, a digital file delivery service for exchanging large design and video files. CTO Noah Broadwater took notice, and then contacted YouSendIt to secure an enterprise version of the popular service.

The upshot: "IT has become a trusted business partner. It now helps users with contracts," says Broadwater.

The IT group also launched a dedicated R&D group that focuses specifically on consumer technologies and works on projects dealing with how to best leverage Facebook, Google, Twitter and mobile devices. Broadwater is fond of pointing out that Sesame Street character Big Bird has been tweeting for the last two and a half years.

"By having early adopters in IT and getting ahead of technologies, users will now come to us when they want to use something like Basecamp [a Web app for storing, coordinating and managing projects]," Broadwater explains. "When they do, we tell them about Central Desktop," which he describes as a similar cloud-based project management service "but with better integration into the enterprise."

Today, Sesame Street co-producers in offices as far away as Afghanistan and Pakistan can upload rough cuts of video to the cloud, and producers in New York can edit and annotate it, he says, noting that 30% of expenses within the official IT budget at Sesame Workshop are devoted to cloud services, consumer services and mobile enablement.

"IT used to be dictatorial, issuing edicts and hammering on security, security, security," Broadwater says. "Now, we've moved to where we're a service organization."

Broadwater also notes that what was once considered shadow IT has also saved the company money. For example, the enterprise YouSendIt service, which costs $50,000 for two years, replaced FTP services that were costing $140,000 for the same period. Similarly, before using Central Desktop, staffers were physically shipping hard drives. The cloud-based service has cut those costs by $20,000, Broadwater says.

At Equinix, Lillie set up an "Amazon sandbox" for developers who were buying Amazon's cloud services on their own to develop apps.

Developing apps on Amazon, he says, is great "because it doesn't tax IT's resources. But as opposed to employees pulling out their credit cards and paying for Amazon on their own, why not give it to them? You become part of shadow IT and the lines start to blur," he says. "IT is expanding its influence, and more importantly, you're working as a team."

But there is a downside.

"The challenge is that sometimes when something has been OK'd, then it's not cool," says Lillie. "There's a coolness to being in the shadows, which drives me nuts."

Redefine IT's role as educator and policymaker

"Consumerization of IT is an inevitable reality," says Kraft's Dajani. One of IT's expanding roles in this new world is to develop and implement security and other policies that help rather than hinder employees, regardless of the device they use to do their work.

Kraft, for example, is virtualizing its applications environment so mobile workers in particular can use the device of their choice. "But users have to keep their versions of software up to date, and we keep track of that," Dajani says. "If people are running software on Androids and it's not up to date after 30 days, we lock them out."

"We need to empower employees, but we also need to teach them," he adds.

Todd Coombes, CIO at insurer CNO in Indianapolis, works with his peers in the lines of business to develop policies that will work for both IT and users who want to innovate using Web-based apps and consumer technology.

"If I were to take a hard line and say 'no shadow IT,' I'm not going to be adding any value for my business partners, and it will create resentments and wreck relationships," Coombes says. Moreover, many of the most innovative ideas for high-value productivity applications come from workers in the field, he adds.

IT innovation at the edges

Just because tech-savvy business users are increasingly tapping consumer-type apps and other shadow systems to do their day-to-day work, there is still plenty of room -- and need -- for innovation from IT, experts say.

Yet, to provide truly useful innovations that will add value, most IT organizations must get far more deeply entrenched in the business.

"Innovation is still happening in IT -- be it IT-led or IT-facilitated -- but only at those organizations where there's an explicit agreement that IT has a role in market-facing innovation," notes PwC principal Chris Curran. Too much of the time, Curran says, "there's a disconnect" between IT and making an impact in the marketplace.

Part of the problem is that IT leaders "are pretty insular in terms of how and where they get their ideas," Curran says. "People don't spend enough time really understanding what's going on around them."

To gain a greater understanding, "keep your eye on the periphery of your organizations," advises Dion Hinchcliffe, senior vice president of the Dachis Group. "IT initiatives are moving to the far corners and in the trenches where people have problems and need to solve them not in weeks or months, but hours. They're evaluating five or 10 things in an hour and solving their problems," he says.

Curran tells a story that he says is common enough, this one from a global high tech company where he recently had a consulting engagement.

"One of their board members asked what the company was doing with social media. Peeling back the onion, we found a knowledge management function that reported up to the COO that was responsible for the internal enterprise collaboration side of social media. We also found five other significant teams that had customer-facing, market-facing or some hybrid collaborative initiative using IT," Curran recalls.

"But when we went to IT and asked what they had, they said they didn't have anyone working on this. There was no coordination function within IT that was even loosely trying to plug the pieces together," he says.

Curran says IT also needs to revamp its now out-of-date application development techniques to be truly innovative -- and to provide useful innovations.

"What I'm still seeing is old waterfall methodology, checklists and big document requirements and business case documents and scope documents, which are all very heavyweight," he notes. "These are things that are made for large ERP projects or massive Cobol projects and don't take into account agile and rapid methods or the good lessons learned around iterative development and prototyping. IT's methods are old and need to be updated. The approaches to software building are antiquated."

Jim DiMarzio, CIO at Mazda North American Operations in Irvine, Calif., has found a way around this particular hurdle in the form of more "proof of concept" projects.

"IT people like getting involved in new technology, but they understand there's a risk and they don't want to be tagged with a technology that has failed," DiMarzio says.

"When we tag projects as 'proof of concept,' " he adds, "they understand it is something that we are trying [and may or may not ultimately deploy]."

-- Julia King

CNO's T64 application (T64 is short for Turning 64), for example, was developed by the company's independent agents who sell insurance door-to-door, mainly to retirees. The T64 app lets agents see on their mobile devices a list of potential clients who are turning 64 years old, along with directions to the clients' homes.

" 'We're in this together' is now much more than a tagline," says Rick Bauer, a former CIO and now director of product management at CompTIA, a provider of vendor-neutral certifications for IT professionals. "No one else is going to educate the enterprise about using devices in ways that boost productivity and in ways that are safe. IT has got to be a leader in helping people to think about these things."

Find your allies

If you're looking for shadow IT, one of the first places you'll find it is in the sales and marketing department, experts say. These front-line workers have little patience with time-consuming, checklist-laden application development cycles, which is what they have come to expect from IT. They want what they want, and they want it now. So they often gin it up for themselves.